According to the press, the feds seized three million bitcoins from Silkroad. How can virtual money be seized? Once seized, what do they do with it? I cannot see that it can be destroyed, or removed from the system, but reducing the amount available could increase the value of outstanding coins.

I'm reading the story a little differently. My take is that the feds seized the assets of Silkroad, put that company out of commission and out of the marketplace. Silkroad was a major user of Bitcoin as the medium of exchange, therefor people had Silkroad to buy their bitcoins, so a ready market for it, quick liquidity. Without Silkroad the buyers market is tighter.

Speculation:
Also it appears that Silkroad dealt in the drug trade, perhaps a lot of the people using bitcoins were also involved and that's how they paid for their drugs. With the distrubuter now out of action, all the people who got there drugs this way may have these bitcoins but can no longer use them for their drug buys.

Bitcoin is essentially works the same as physical cash or western union from a how you spend it perspective. That is, once you spend bitcoins the transaction isn't reversable and you don't have the coins anymore/can't spend them again. They seized the hard drives, usb keys, or passwords to dropbox accounts containing the bitcoins, etc, something like that. They could destroy the bitcoins unrecoverably by simply deleting them (and all backups), or they could (and probably should) convert them into US $ over time.

Bitcoins, technically, aren't stored on the user's computer. They only exist as entries in the blockchain, the shared public transaction ledger. Bitcoin is based on public/private key cryptography. All bitcoins are associated with a private key, which you need to have to use the bitcoins. The private key is used to authenticate the transactions that move bitcoins from one address to another, while "mining" is how the transactions are validated.

Private keys are typically stored on the user's hard drive (or USB drive, etc.), but they don't have to be (Some people use long memorized passphrases to generate the private key). Losing or deleting the private key doesn't destroy the bitcoins, it just makes them inaccessible. To seize bitcoins, law enforcement would use the recovered private key to transfer the seized coins to an address controlled by law enforcement, lest someone with a copy of the original private key take them.

If they did that, would that make them available to be recovered by mining them all over again?

I overly simplified in my first post, and I thank Cleophus for his clarification (although the distinction between being inaccessible and destroyed is small, ie if you lose/destroy the private key they are essentially destroyed).
Mining is essentially maintaining the transaction register, and when you do that you are allowed to add new bitcoins essentially as a reward. You don't recover or "create" bitcoins in the mining process itself (assuming I understand bitcoin properly, as it is very complicated - https://en.bitcoin.it/wiki/Mining).

There have been extensive articles in the New Yorker magazine (Crypto-currency 11 X, 2010) and the NY Times. I can understand that the feds might be able to corral and hold the coins, but I cannot see how it could possible delete or destroy them. There can be no doubt that the U.S. has been engaged in attempting to neutralize the program for at least two years now. If they have not been able to break into it (as Kaspersky failed also after extended attempts), they are probably going to have to save their $3 million in bitcoin in their account.

There is no bitcoin as an entity that could take this sort of action. There are lots of people who use the bitcoin protocol to exchange bitcoins. Bitcoins would loose a lot of their value as a medium of exchange if groups of users could destroy other users bit coins in some way.

There have been extensive articles in the New Yorker magazine (Crypto-currency 11 X, 2010) and the NY Times. I can understand that the feds might be able to corral and hold the coins, but I cannot see how it could possible delete or destroy them.

If they have the key to those coins, they can simply destroy all copies of the key and those bitcoins will be permanently inaccessible. You're right that this isn't technically destroying them, it's more like dumping gold coins overboard on the high seas. The coins are still there at the bottom of the ocean, but no one will ever be able to use them.

And yet there's a plan for a maximum quantity of bitcoins to be mined (21 million). It's now got me wondering; isn't that plan essentially unworkable, as every time someone dies and takes their private key with them, or if a seizure really occurred here, the total number of bitcoins in circulation is decreased, commensurately decreasing the money supply. It seems that would have to be remedied, but I don't see how it's possible given the constraints of the system.

Bitcoins, technically, aren't stored on the user's computer. They only exist as entries in the blockchain, the shared public transaction ledger. Bitcoin is based on public/private key cryptography. All bitcoins are associated with a private key, which you need to have to use the bitcoins. The private key is used to authenticate the transactions that move bitcoins from one address to another, while "mining" is how the transactions are validated.

Private keys are typically stored on the user's hard drive (or USB drive, etc.), but they don't have to be (Some people use long memorized passphrases to generate the private key). Losing or deleting the private key doesn't destroy the bitcoins, it just makes them inaccessible. To seize bitcoins, law enforcement would use the recovered private key to transfer the seized coins to an address controlled by law enforcement, lest someone with a copy of the original private key take them.

Whilst this is technically all true, it may mislead some. Since it is essential to have the private key to a bitcoin address in order to spend the bitcoins at that address, I think it is fair to say that a bitcoin 'exists' in the location where its private key exists, be that a hard drive on a laptop, a server from a web service, or someone's head. If the private key is destroyed, those bitcoins can never* be spent again, so again I think it is perfectly cromulent to say that those bitcoins have been 'destroyed'. So the feds could very simply destroy those bitcoins by deleting the wallet. What they cannot delete (and in fact this would work very much in their favour) is the transaction record in the blockchain - THAT is distributed all over the intertubes. So bitcoin is an interesting kind of money, in that you can destroy the money but you can't destroy the evidence that it was used, how much it was, and who was involved in the transaction.

*'never' as physicists and applied mathematicians would understand it, not pure mathematicians. But sure, if you have a couple of spare universes to play with, by all means try to get those private keys back!

And yet there's a plan for a maximum quantity of bitcoins to be mined (21 million). It's now got me wondering; isn't that plan essentially unworkable, as every time someone dies and takes their private key with them, or if a seizure really occurred here, the total number of bitcoins in circulation is decreased, commensurately decreasing the money supply. It seems that would have to be remedied, but I don't see how it's possible given the constraints of the system.

Bitcoinistas see this as a strength rather than a weakness of bitcoin. It works fine as long as bitcoins are infinitely divisible, which I gather they are (they are currently stored to eight decimal places but I'm told this can be extended painlessly in the future as needed). I'm sold on the maths behind it. I have no understanding of economics, I'm told that permanent deflation is bad but I'm not convinced about that.

If they did that, would that make them available to be recovered by mining them all over again?

No, mining doesn't 'recover old coins', it only generates new ones (and at a predetermined and exponentially decreasing rate, such that the total number ever mined will be just shy of 21 million). As Isilder pointed out, if a bunch of bitcoins have been sitting untouched at some address for the last sixty years, no one can tell whether their private key has been lost, or their owner's just hoarding them. If the protocol were to recycle them without the owner's consent that would be theft.

[derail] Having said that, some peeps on the bitcointalk forum do occasionally advocate a controlled recycling scheme, and I have become one of them. The first response we always get is THIIIIIIIEEEEEEFFFF!!!!1!1!! Then we take the trouble to explain that in our way of imagining the protocol change, all bitcoin software and forums and people involved would make it abundantly clear how the new protocol worked, wallets would frequently remind their owners of the need to 'refresh' their bitcoins when necessary, and would probably do it automatically when the need arose. So the issue of consent would be done and dusted. Our interlocutors pause a moment, before screaming THIIIIIIEEEEEEFFFFF!!!!! again. Aaah, libertarians. It reminds me very much of Nigel's insistence that his amp 'goes up to eleven'. [/derail]

Bitcoinistas see this as a strength rather than a weakness of bitcoin. It works fine as long as bitcoins are infinitely divisible, which I gather they are (they are currently stored to eight decimal places but I'm told this can be extended painlessly in the future as needed). I'm sold on the maths behind it. I have no understanding of economics, I'm told that permanent deflation is bad but I'm not convinced about that.

Deflation is bad only insofar as it exists against the common currency you are operating with. Few get paid in bitcoins and they are used for only a very narrow set of transactions within any economy. Bitcoins are a lot like precious metals in an economy with fiat currency. Mostly harmless, insofar as deflation is concerned.

Then the feds go after Bitcoin for destruction of evidence and obstruction of justice. In other words, Bitcoin goes down as well.

Go after who? Bitcoin isn't a company, or a physical thing. It's a distributed currency. There's nobody to go after.

ETA: as I understand it the bitcoins seized in the raid were being held in escrow by SilkRoad. They're essentially money that has been spent by people trying to buy drugs being kept in a dedicated account until those drugs arrive.

Now I understand why some are asking for the Fed, if they choose to destroy the data, to report which keys they are destroying. Those could then be mined again, right?

Sigh. No. Bitcoins can't be remined, as I said repeatedly.

Quote:

Originally Posted by brickbacon

Can't anyone with the key or an fairly up to date image of the server Silk Road was hosted on, just steal all the money now? Or do you think the US Gov transferred all the money to its own accounts?

With the key, yes. With the server image, no. Unless the key was stored on the server image, which would be a supremely stupid (and completely pointless) thing to do. As for the gov transferring the money, I believe they have already done this, haven't checked the blockchain myself but everyone in the resurrected bitcointalk forums says so.

Quote:

Originally Posted by DrDeth

Actually if the feds want to hurt Bitcoins they need to re-release the coins back into circulation, thus driving down the value.

It wouldn't do very much, it's some 20k bitcoins out of over 10 million.

If they have the key to those coins, they can simply destroy all copies of the key and those bitcoins will be permanently inaccessible. You're right that this isn't technically destroying them, it's more like dumping gold coins overboard on the high seas. The coins are still there at the bottom of the ocean, but no one will ever be able to use them.

Right.

Quote:

Originally Posted by Nancarrow

Since it is essential to have the private key to a bitcoin address in order to spend the bitcoins at that address, I think it is fair to say that a bitcoin 'exists' in the location where its private key exists, be that a hard drive on a laptop, a server from a web service, or someone's head. If the private key is destroyed, those bitcoins can never* be spent again, so again I think it is perfectly cromulent to say that those bitcoins have been 'destroyed'. So the feds could very simply destroy those bitcoins by deleting the wallet. What they cannot delete (and in fact this would work very much in their favour) is the transaction record in the blockchain - THAT is distributed all over the intertubes. So bitcoin is an interesting kind of money, in that you can destroy the money but you can't destroy the evidence that it was used, how much it was, and who was involved in the transaction.

Right -- although there's dispute about the "who" part. That is, if "who" is a number, yes. Attributing that number to an individual is possible if the person wasn't very very careful. However, a careful (and capable) enough person might be able to avoid any traces.

Quote:

Originally Posted by brickbacon

Can't anyone with the key or an fairly up to date image of the server Silk Road was hosted on, just steal all the money now? Or do you think the US Gov transferred all the money to its own accounts?

The wallet would be password-protected, unless those holding the wallet are foolish. If someone has the data and is really good at crypto and has the processing resources and the password wasn't terribly strong, it might be recoverable.

Quote:

Originally Posted by Measure for Measure

Deflation is bad only insofar as it exists against the common currency you are operating with.

Deflation as a general rule is a terrible thing for a national or world economy, because it encourages hoarding rather than investment. However, bitcoins aren't a dominant currency, they're at most a hedge, and a deflationary hedge might just be ideal to drive the value up: it encourages hoarding the bitcoins, and the more people hoard them (and want to hoard them) the more valuable they become. So, bad for sawbucks, good for bitcoins.

Quote:

Originally Posted by BigT

Now I understand why some are asking for the Fed, if they choose to destroy the data, to report which keys they are destroying.

If they report the keys, whover was quickest at spending them would win. I don't believe there's a way to destroy them. The most they could do is transfer them to the same account, and state that all bitcoins on that account would never be transferred again (the new keys go to the bit bucket). I doubt the transaction records for those keys would get deleted, so it'd really be no different than simply deleting the original keys, except maybe people would know exactly which ones went to limbo.

Money has two purposes which are related, store of value and medium of exchange. The store of value of bitcoins is that inflation is supposedly impossible because only 21 million will ever be created. Not spending the seized bitcoins will make the others slightly more valuable. However, the primary function of money is medium of exchange. The fewer bitcoins that are being circulated the fewer people will be willing to take them and the fewer people that will be willing to spend them. This downward spiral would destroy bitcoins value as a medium of exchange. If they are no longer useful as a medium of exchange then they lose their use as a store of value. It is impossible to inflate confederate money as well but it is still worthless. What the Silk Road bust proves is that anonymity in online transactions is harder than people thought and if these types of websites are the primary marketplace where bitcoins are used, then bitcoins may be in trouble.